Crash Bang

A new capital requirement is shaking up Sri Lanka’s fragmented banking industry, encouraging mergers of small banks and forcing all to make more efficient use of their funds, analysts say. In April, the central bank said all banks must have at least Rs. 2.5 billion ($25 million) in Tier 1 capital by the end of 2007, a fivefold increase from the current requirement to hold Rs.500 million.

For the country’s two-largest banks, state-owned Bank of Ceylon and People’s Bank, this rule presents no major problems as at the end of last year they had combined banking assets of Rs. 530 billion.

But for the nine other domestic banks and 11 branches of foreign banks, the new rules are making them consider the business case for meeting the capital requirement and whether they can generate an adequate return once the requirement is met.

Holding Rs. 2.5 billion in Tier 1 capital, which must be in the form of share capital and reserves, would be beyond the scale of some smaller banks.

It may make more sense for some of these smaller domestic banks and financial institutions to merge.

Indeed, that process has already begun.

Last month, long-term lender